Wall Street hangs up on AT&T

JonFriedman

BASKING RIDGE, N.J. (CBS.MW) -- Wall Street is slamming the receiver down on Ma Bell, marking the low point for a stock once regarded as an investment haven for widows and orphans.

Shares of AT&T (T), the largest U.S. telephone company, with more than 80 million customers, have lost about 36 percent of their value in the past year and dropped from a 52-week high of 61 marked last Nov. 29.

The latest piece of bad news streaming out of AT&T occurred Friday when the company disclosed that it will raise its basic long-distance phone rates as much as 26 percent and roll out discount plans, only two weeks after halting an earlier price hike following sharp criticism from regulators and customers. AT&T said the new price scheme will reduce 2000 profits by 1 cent to 2 cents a share.

AT&T said it will lower a minimum $3 monthly fee on low-volume customers, and will lift basic per-minute daytime rates during the weekdays to 29.5 cents, nighttime charges to 22.5 cents and weekend rates to 14.5 cents. The previous structure called for weekday per-minute rates of 26 cents, 16 cents during the evening and 11.5 cents on the weekends.

AT&T’s game plan depends on selling to as many corporate and residential customers as possible a multitude of communications services, encompassing both old-fashioned telephone connections and the brave new world of the wireless, broadband and Internet technology.

“I don’t own any AT&T shares,” said Robert Hagstrom, a fund manager with Legg Mason Focus Capital. “I need a demonstration that they can generate cash beyond their operating needs.”

To its frustration, the Basking Ridge, N.J., behemoth has failed to rally support from investors.

AT&T is “surprised and dismayed” by the equity market’s resistance, said John Petrillo, executive vice president for corporate strategy.

Some professional investors criticize AT&T management’s performance.

“I do not own any AT&T,” said Scott Schoelzel, manager of the $30-billion-plus Janus Twenty Fund in Denver. “There has been a significant management exodus over the past 24 months. It’s a very bureaucratic place laden with telephone execs who (are) just moving at the speed required in today’s environment.”

On the other hand, perhaps some old-fashioned investors aren’t sure what to make of AT&T these days.

Under Chairman Michael Armstrong, AT&T is no longer your grandfather’s telephone company. In fact, AT&T’s evolving so quickly as it scrambles to keep one step ahead of the competition and keep pace with ever-changing computer technology that it isn’t even your older brother’s telephone company. Investors now seem to regard AT&T more like an aggressive-growth stock than a staid utility.

A dose of good fortune for AT&T came on Thursday when it won a federal appeals court fight to block an earlier federal judge’s ruling in Portland, Ore. that made the company lease its high-speed cable Internet connections to foes in that city.

The latest ruling is a significant defeat for Internet service providers that have been trying to persuade local governments to pass regulations giving them access to cable companies' connections. See full story.

The decision, handed down by the U.S. 9th Circuit Court of Appeals overruled an earlier federal court decision in Portland that forced AT&T's cable operations to open access of its lines to competitors of AT&T's ISP such as Excite AtHome.

"We're pleased with today's ruling because it clarifies decisively the limits of local authority when it comes to the provision of high-speed Internet access over cable," said Jim Cicconi, AT&T's general counsel.

Armstrong’s plan

Thursday’s development removes a little uncertainty facing the company’s future growth plans, the fulcrum of which is the cable businesses.

Armstrong wants to use AT&T’s cable units to circumvent the local Baby Bells. Why? AT&T has to pay the Bells large amounts of money every year to connect its customers’ phone calls to its own long-distance network. By connecting cable lines directly to homes and offices, AT&T is one step away from providing long-distance phone service over those lines. Do that, and presto, away goes another headache for AT&T’s accounts payable department. It will also use the cable lines to provide high-speed Internet connections.

Eyeing the decline in long-distance phone prices currently underway, Armstrong has bet AT&T’s future on a series of huge acquisitions.

Armstrong, 61, has spent more than $100 billion to acquire and bolster the company’s cable TV systems. His goal is to deliver telephone, video and data to people’s homes on a single wire. Having concluded a $44 billion acquisition of MediaOne on June 15, AT&T becomes the largest cable television operator in the U.S. It can now reach out and touch 16 million cable TV customers in the U.S.

“Now that MediaOne has closed, they will be running out of excuses soon,” said Schoelzel of Janus. “It’s really getting to the show-me stage.”

To comply with the Federal Communications Commission’s 30 percent cable ownership ceiling, AT&T will probably divest Liberty Media, Merrill Lynch’s Quinton said in a recent investment research report. He said the decision would result in a neutral impact on AT&T shares since Liberty Media is a tracking stock in which AT&T doesn’t have an economic interest.

Plus, AT&T on June 19 said it agreed to purchase mobile-phone systems in San Francisco, San Diego and Houston for $3.3 billion in cash in a bid to reduce calling costs and go up against such national systems operators as Verizon Wireless. It’s the company’s first major acquisition in the wireless sector since AT&T took its wireless unit public in a $10.6 billion initial public offering on April 27. The AT&T Wireless (AWE) move was the biggest U.S. IPO ever.

AT&T is making the big bets because the competition in its businesses is more intense than ever. Rivals abound. Among them, hulks such as Microsoft (MSFT) and Time Warner (TWX) stand ready to leverage cross-platform offerings. In addition, national carriers such as VoiceStream Wireless, a joint venture of SBC Communications (SBC) and BellSouth (BLS), loom on the horizon.

Telecommunications companies are expanding through acquisitions, sparking antitrust concerns and throwing more uncertainty over the industry. On June 21, shares of WorldCom (WCOM) and Sprint declined on worries that U.S. and European Union authorities could prevent their plan to combine. The merger, initially valued as high as $149 billion when announced, has since seen a steady drop to the $115 billion to $125 billion range.

Meanwhile, AT&T’s stock market prospects are further hampered by investors’ indifference to its business.

“The telecommunications industry is less attractive than others are because it is highly, highly competitive with low margins,” Hagstrom said.

To be sure, AT&T recognizes the stock market’s growing impatience. Ironically, perhaps, AT&T, the bluest of the blue-chip companies, now finds itself in the disquieting position of identifying with the plight of a garden-variety Internet company. Internet stocks have lagged the stock market because investors have tired of hearing their promises and now demand results.

Suddenly, AT&T finds itself in the same sort of quagmire.

“People have got to see us deliver on the strategy,” said AT&T’s Petrillo. “They ask us, `How many subscribers does the new cable TV operation have? And what about Internet access? Wireless? Cable and wireless concurrently? And how many business customers can you sign up?’”

As they examine the litany of their concerns about AT&T, some stock market pundits are ready to point an accusatory finger at AT&T Chief Executive Armstrong.

“I bought AT&T stock when Armstrong took over and I find the events of the past few weeks to be disquieting,” said Michael Holland, president of New York money manager Holland & Co.

“The worst I can say about Mr. Armstrong now is that his recent performance reminds me of AT&T under Mr. Allen,” Holland said, referring to Armstrong’s predecessor, Robert Allen. The latter stages of Allen’s tenure at AT&T were marked by criticism of his moves and a low stock price. CBS.MarketWatch.com attempts to reach Armstrong for a response weren’t successful.

Holland was irked when AT&T clumsily incurred a self-inflicted blow to its image. Earlier this month, AT&T raised basic rates on its residential long-distance service. “AT&T promised to pass on savings to all consumers,” a furious FCC Chairman William Kennard said at the time. “Their new rate plan does not do that. It is in our order, and I’m going to enforce it.” AT&T retracted the increases a few days later.

“We plan on refiling our consumer basic rate plan soon with the FCC,” said John Heath, an AT&T spokesman.

AT&T made another curious move this month when its cable TV operation agreed to air a pornography channel called the Hot Network. The Hot Network and its partner, the Hot Zone, have 26 million subscribers.

“The Hot Network, which is not a weather channel, features pay-per-view erotic films with late-night titles such as Wages of Sin and Cheerleader Strippers,” noted U.S. News & World Report magazine.

For shareholders, AT&T’s prospects hinge on the ability of Armstrong to manage both the company’s strategy and the stock market’s reaction to his moves. Armstrong is well aware that hard-charging John Malone, now one of AT&T’s largest stockholders, is watching closely. AT&T in March 1999 acquired Malone’s company, Tele-Communications Inc., and its 11 million subscribers, for some $48 billion.

Malone is one of Wall Street’s favorite executives because he has shown a Midas touch in maximizing shareholder value. Malone, who didn’t return a phone call seeking comment on AT&T, owns 32.6 million AT&T shares. It wouldn’t shock analysts if Malone played a larger role within AT&T and perhaps even became its chairman at some point. Money manager Holland termed such a move to be a “possibility.”

AT&T continues to change out of all recognition of the company that the government ordered to be broken up 16 years ago.

“I’ve been here for 29 years,” said AT&T’s Petrillo. “I thought the divestiture in 1984 was a big deal. I have to say, we’re doing things faster now than we ever have - and more is coming.”

It's going to be another year or two before investors get a good idea if Armstrong succeeds, but do investors want to hold on to a stock until they find out when their money could get a better return elsewhere? AT&T has made a huge bet, but investors won't likely know if it rolled a lucky seven or a snake eyes anytime soon.

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